Budget and Budgeting For Small Businesses

[Paul Carcone]

The following is an exerpt from the book I am currently writing to help Small Businesses. For futher details, please see my profile.

Budget & Budgeting

Master budget

A Master Budget for the entire organisation brings together the departmental or activity budgets for all the departments or responsibility areas of the organisation.

Master and supporting budgets & their relationship

The structure of a budget will depend on the nature of the organisation. In a manufacturing organisation, for example, the budgeting process will probably consist of the preparation of several functional budgets beginning with a sales budget.

Sales budget & sales forecast

The sales budget is the plan for the volume of sales, in quantities and sales revenue. Unless there is a production-limiting factor, the sales budget is usually the starting point for preparing the Master Budget.

However, in practice, organisations prepare their sales budgets in much more details and are likely to be analysed by region and area as well as by product.

Comparative figures from the previous year will also be shown. This will indicate whether planned sales are higher or lower than previous years and will show how the product is performing overall.

Production Budget

The production budget can be calculated by taking the sales budget in units and adjusting the figures for planned changes in inventories of finished goods and work in progress. If there is a planned increase in inventory levels, production volume will exceed the planned sales volume. If inventory levels are planned to fall, production will be lower than the sales.

Having established the production budget in quantity terms, the various elements of the production elements can be budgeted.

Direct Materials Budget

The direct materials budget is calculated from the production quantities in both units of raw material and direct material production cost.

The direct materials production budget is the usage budget adjusted for any planned increase or decrease in raw material inventories.

In this example, raw materials are assumed to be direct materials only. In practice, a Direct Materials Budget is also required for indirect materials where these are significant in either volume or cost.
Direct Labour Budget

The budgeted production volumes also drives the Direct Labour Budget. It is simply calculated from the amount of hours directly involved in the manufacture of the particular products. It does not include the wages of office staff, or other administrative wages.

Factory Overhead Budget

The Factory Overhead Costs will be apportioned on one the aforementioned Direct Costs. Of course, only some of these costs will be variable and others will be fixed. Using the above example, apportioning costs on a Direct Labour Cost would yield the following:

Variable Cost of Production Budget

The Production Budget has already been prepared in terms of units. A Cost of Production Budget can now be prepared for each product.

Operating Expense Budget

The Operating Expense Budget is set up to monitor the expenses incurred by the business in general trading that is not directly associated with the manufacture of the goods sold. This will include the costs of the sales force, administrative expenses and other general costs.

Many of these costs will not be directly related to the performance of the manufacturing division, although significant changes in costs may be linked in periods of a sales drive leading to increased output.

Cash Budget

A cash budget is simply a plan of cash flows throughout the period. Cash management is a key area of financial management and most organisations will produce a highly detailed forecast of cash receipts and cash payments. The timespan of this budget is often much shorter than others due to the inherent inaccuracies in predicting accurate receipt and payment times.

Variable Cost of Goods Sold Budget

The Cost of Goods Sold Budget is calculated by adjusting the Production cost budget to allow for changes in inventories of finished goods.
Budgeted Income Statement

Now that all of the information is prepared, a Budgeted Income Statement can be prepared. Administrative and marketing overheads are deducted as a period charge from the Gross Profit.

[GlasgowGirl]

When's your book due out Paul?

[Joe]

Thanks for sharing this Paul

[Nicola]

This is an exceptionally useful post for anyone who runs a business...and some of it is even applicable to running the family budget!!